UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

OFFICE OFTHE CHAIRMAN

March 7, 2019

The Honorable Ted Budd

U.S. House of Representatives 118 Cannon House Office Building Washington, DC 20515

Dear Representative Budd:

Thank you for your October 1, 2018 letter regarding the application of the federal securities laws to digital assets. The SEC has been focusing a significant amount of attention and resources on digital assets and initial coin offerings (ICOs). Overall, I believe we have taken a balanced regulatory approach that fosters responsible innovation in this area, while also protecting investors and the markets.

Your letter urges the Commission to clarify the criteria used to determine whether a digital token is offered or sold as an investment contract, and therefore is an offer or sale of a security. As the Commission stated in the July 2017 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (DAO Report), whether a particular transaction involves the offer and sale of a security—regardless of the terminology used to identify the digital asset—will depend on the facts and circumstances, including the economic realities of the transaction.

Generally, we look at whether the digital asset fits the definition of a security as set forth in the federal securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 define "'security" broadly to encompass virtually any instrument that may be sold as an investment. We also apply tests developed through case law, including the well-established "investment contract"* test articulated by the Supreme Court in SEC v. Howey and its progeny, including UnitedHousing Found, Inc. v. Forman. As those cases explain, the "touchstone" of an investment contract "is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." The determination of whether a digital asset is an "investment contract" depends on the application of Howey and its progeny to the particular facts and circumstances of the digital asset transaction.

I believe that the Commission has been transparent with the criteria used to determine whether a digital asset is offered or sold as an investment contract. The DAO Report included detailed legal analysis applying Howey to the facts and circumstances specific to the DAO tokens. Additionally, as your letter notes, Bill Hinman, the Director of the Division of Corporation Finance, delivered a speech in June 2018 that outlined factors for market participants to consider when evaluating whether a digital asset is a security. Moreover, in November 2018, the Divisions of Corporation Finance, Investment Management, and TradingThe Honorable Ted BuddPage 2

and Markets issued a statement on digital assets issuance and trading, which included detailsabout how a company that conducted an unregistered securities offering through an ICO mightremediate and move forward.

At the same time, I understand the desire for further dialogue on the subject. TheCommission and its staff actively engage with innovators, developers and entrepreneurs in thefield of distributed ledger technology. Issuing public statements on the subject is an importantpart of that engagement, and I, along with Commission staff, have issued statements, deliveredspeeches, and provided Congressional testimony, which can be found at www.sec.gov/ICO. Thestaff also is developing additional guidance designed to aid participants in determining whether adigital asset is offered or sold as a security.

Your letter also asks whether I agree with certain statements concerning digital tokens inDirector Hinman's June 2018 speech. I agree that the analysis of whether a digital asset isoffered or sold as a security is not static and does not strictly inhere to the instrument. A digitalasset may be offered and sold initially as a security because it meets the definition of aninvestment contract, but that designation may change over time if the digital asset later is offeredand sold in such a way that it will no longer meet that definition. I agree with Director Hinman'sexplanation of how a digital asset transaction may no longer represent an investment contract if,for example, purchasers would no longer reasonably expect a person or group to carry out theessential managerial or entrepreneurial efforts. Under those circumstances, the digital asset maynot represent an investment contract under the Howey framework.

Lastly, the SEC has implemented a number of initiatives designed to aid innovators,including those in the distributed ledger technology space. In October 2018, the SEC announcedthe formation of the Strategic Hub for Innovation and Financial Technology (FinHub), whichserves as a public resource for FinTech-related issues at the SEC, including matters dealing withdistributed ledger technology. The FinHub provides a portal for industry and the public toengage directly with SEC staff on innovative ideas and technological developments.Additionally, the FinHub is a warehouse of information regarding the SEC's activities andinitiatives involving FinTech and will serve as a platform and clearinghouse for SEC staff toacquire and disseminate information and FinTech-related knowledge within the agency. TheFinHub replaced and built upon the work of several internal working groups at the SEC that havebeen focused on similar issues for some time and were similarly engaging with the public.

In addition to statements, testimony, speeches, and the DAO Report, the SEC has soughtto educate investors on ICOs through a number of Investor Bulletins warning of the risks of suchinvestments, as well as through our "launch" of "HoweyCoins.com"—a mock ICO websitedesign to attract potential investors and direct them to the SEC's educational materials. We havepublished a collection of these materials at investor.gov, on a spotlight page for ICOs and digitalassets.

As these initiatives demonstrate, the Commission's efforts to address the application of

the federal securities laws to the offer and sale of digital assets have not been limited toThe Honorable Ted BuddPage 3

enforcement actions. Unfortunately, while some market participants have engaged with our staffconstructively and in good faith with questions about the application of our federal securitieslaws, others have sought to prey on investors' excitement about cryptocurrencies and ICOs tocommit fraud or other violations of the federal securities laws. The Division of Enforcement hasbrought a number of important cases in this area, and I have asked the Division's leadership tocontinue to police these markets vigorously and recommend enforcement actions against thosewho conduct ICOs or engage in other actions relating to digital assets in violation of the federalsecurities laws. The Commission acted swiftly to crack down on allegedly fraudulent activity inthis space, particularly where the misconduct has targeted Main Street investors. Regardless ofthe promise of distributed ledger technology, those who invest their hard-earned money inopportunities that fall within the scope of the federal securities laws deserve the full protectionsafforded under those laws.

Thank you again for your letter. Please do not hesitate to contact me at (202) 551-2100,or have a member of your staff contact Bryan Wood, Director of the Office of Legislative andIntergovernmental Affairs, at (202) 551-2010, if you have any questions or comments.